Technology, Markets, & Global Finance by Paul Barsch

Sad, Spending and Overpaying

If you are depressed or even a little bit sad, keep your wallet at home. That’s the advice from experiments conducted by social psychologists at Harvard, Stanford and other universities. Behavioral research studies show that “feeling sad” may cause people to overpay for commodities at the rate of 30-300% more than they otherwise would. This research of course, flies in the face of New Classical economists claiming most individual consumers evaluate and make rational purchasing decisions. When it comes to spending, are you rational, or does emotion play a larger role?

A PBS special, “Mind over Money” mentions two schools of thought in economic decision-making; rationalists vs. behavioralists. The rationalists assume that consumers are completely rational, evaluating all available alternatives in a world of perfect information. Behavioralists, on the other hand, believe that emotion, excitement, and mood play a larger role in economic decision-making than previously considered.

A research report titled “Misery is Not Miserly” sheds some light on which line of thinking currently has the upper hand.

In a study, researchers hypothesized that people who “feel sad” and are more “self-focused” tend to spend more for commodities. To prove this hypothesis, psychologists set up two groups in different rooms. The test group was shown a sad video clip (the death of a boy’s mentor from “The Champ”), asked to write an essay, and then instructed to buy sporty water bottle. The baseline group was given the same task, but instead of watching the emotional video clip, members viewed a National Geographic segment on the Great Barrier Reef.

Though rationalists would say that there shouldn’t be any emotion carry-over effects from watching the scene from “The Champ,” the group exposed to the tragic video scene tended to pay up to four times more for the water bottle than the control group. This, in spite of many of the control group participants claiming the video did not affect their decision-making!

The researchers surmise that “sad and self-focused individuals spend more on commodities than other people do because they seek self-enhancement.” This in turn allows them to “increase the valuation of possessions that one might acquire.” In other words, people feeling sad or even depressed may find themselves overpaying for items in an effort to improve their state of mind.

Perhaps at this point you may be thinking that an experiment with water bottles has little relevance in your daily decision-making. Harvard social psychologist Jennifer Lerner would counsel you otherwise. She says, “(These) experiments have been done with high stakes money—a thousand dollars, etc.,—and what we find is that these results scale up, even when you use big money.”

Rational economists like John Cochrane from the Chicago School of Economics say emotions matter very little in economic decision-making. “The observation that people feel emotions means nothing,” he says. “If you’re going to just say markets went up because there was a wave of emotion, you’ve got nothing. That doesn’t tell us what circumstances are likely to make markets go up or down. That would not be a scientific theory.”

Counter that statement with Harvard’s Lerner, who claims emotions play a pretty significant role in economic decision-making, especially when experiments show sad and self-focused people spend more than they should.

The conclusions drawn from this debate matter very much, especially considering economic thought over the past 40 years has centered on rational decision-making. If rational decision-making isn’t the norm for consumers, it may be time to take a fresh look at the power of emotion in driving daily purchasing decisions.

Questions:

• The PBS Mind over Money special asks, “Does raw human emotion dictate your financial decisions, or are we rational calculators of our own self-interest?” What are your thoughts?
• Have you ever shopped when sad or depressed? Would you agree with the Harvard studies that “sad and self focused individuals spend more”?